Summary
- Morgan Stanley is a top investment bank that has become a huge player in the tech IPO scene.
- The stock scores well on both value and growth metrics, with a P/E ratio just above 10 and a 29% five-year earnings growth rate.
- In this article, I develop the thesis that Morgan Stanley is a top "growth at a reasonable price stock" with solid future prospects and a fair price.
Morgan Stanley (NYSE:MS) is a diversified financial services company best known as an investment bank. It has gained a lot of publicity lately, thanks to its role as lead underwriter for several high-profile IPOs. Most recently, it was a lead underwriter on the high-profile Airbnb (ABNB) IPO. Prior to that, it was involved in the offerings of Facebook (FB), Shopify (SHOP), and Alibaba (BABA).
An interesting thing about MS stock is that it scores pretty well on both value and growth metrics. It grew revenue at 16% in the most recent quarter and has a five-year CAGR EPS growth rate of 29%. Despite this decidedly superior growth, the stock trades at just 10.81 times GAAP earnings, as of this writing.
In this article, I will develop the thesis that Morgan Stanley is a top "growth at a reasonable price" stock because of its value metrics and its potential for future growth. I'll start by looking at Morgan Stanley's strength in investment banking and how this could power future profits.
Competitive Landscape
To understand why Morgan Stanley is an excellent stock for growth and value, we need to look at the markets it operates in. An analysis of the competitive landscape can tell us whether Morgan Stanley has room for future growth. If the analysis ends up being favorable, then that, combined with an attractive valuation, supports my thesis that MS is a top stock for both value and growth.
Morgan Stanley is involved in several financial services markets, most notably:
- Investment banking.
- Wealth management.
- Sales and trading.
In all of these markets, MS is a top player. Let's take a look at each of them one by one.
Investment banking
Investment banking is, by far, what Morgan Stanley is best known for. It has been the lead underwriter on countless IPOs, often along with its two main competitors: Goldman Sachs (GS) and JPMorgan Chase (JPM). In the investment banking world, Morgan Stanley is best known for tech IPOs, where it has been involved in most major offerings of the past decade. In terms of overall investment banking revenue, it ranks third, but it's first in global IPOs, largely due to its prominence in tech.
Wealth management
Wealth Management is another big business area for Morgan Stanley. It's smaller than institutional securities, of which investment banking is a part, but bigger than investment banking itself.
The wealth management industry in the U.S. is highly competitive. All the big banks have wealth management divisions, plus there are major players like Vanguard, Fidelity, and Charles Schwab (NYSE:SCHW) in the mix too. This might partially explain why Morgan Stanley's third quarter Wealth management growth was weaker than its investment banking growth. Wealth management grew by just 6.8% in Q3, while institutional securities grew by 20%. Nevertheless, wealth management is a big money-maker for MS, and it's still growing.
Sales and trading services
Sales and trading is a big revenue driver for Morgan Stanley. Like investment banking, it's grouped under "institutional securities" in the company reports. In the context of an investment bank, "sales and trading" means buying and selling securities on behalf of the firm and its clients. Generally speaking, Goldman Sachs leads in this area of i-banking, with $4.5 billion in third quarter trading revenue compared to MS's $4.15 billion. Still, it's a highly profitable and growing business for MS, with revenue up 20% in the third quarter.
